Myanmar still a high-risk
investment By Brian McCartan
CHIANG MAI - Internal debate over a
pending new foreign investment law has exposed
divisions between reformers and conservatives in
Myanmar. How the power struggle shakes out will
determine in large measure the direction and pace
of the country's closely watched economic reform
program.
Big multinational corporations,
including Coca-Cola, Ford Motor Company and
General Electric, have expressed initial interest
in Myanmar, a market American companies were until
recently banned from entering due to US government
imposed economic sanctions. Even with that ban
lifted, companies have remained wary about
committing funds without stronger legal protection
of their investments.
In line with his
broad reform agenda, President Thein Sein
announced plans for a
more liberal investment regime in late 2011. Since
then the law to regulate new foreign investment
has undergone several rewrites and heated debate
in parliament. The new law is designed to replace
the extant and outdated 1988 investment law.
A first draft of the law was sent to
parliament in March but was rejected by
conservative parliamentarians - some with known
links to the business associates of former junta
leaders - as overly advantageous to foreign
interests. Although full details of the
legislation have not yet been made public, earlier
drafts reportedly included several restrictions on
foreign capital, including bans on foreign
investment in as many as 13 sectors.
A
series of rewrites since reflects philosophical
infighting over how much and how fast to open the
economy after decades of political isolation and
military mismanagement. While both sides recognize
the need to attract more foreign capital,
particularly from the West, there are concomitant
fears that foreign firms will quickly overwhelm
indigenous firms without certain protectionist
measures.
The current draft of the law
passed parliament on September 7, the last day of
the most recent parliamentary session. The draft
reportedly upped the foreign ownership limit in
allowed sectors to a more liberal 50% from 49%
outlined in a previous draft.
It also
dropped a controversial US$5 million minimum
investment clause, a provision some argued would
favor larger, politically connected local firms at
the expense of small and medium-sized enterprises
(SMEs). The maximum tax holiday for foreigners was
raised from three to five years, while foreigners
will be allowed to lease land for 50 years with
two possible 10-year extensions.
Regulatory powers will be concentrated at
the Myanmar Investment Commission (MIC), including
discretion over the licensing of foreign firms.
The MIC, once renowned for its obstructionist and
corrupt practices, is now bidding to reinvent
itself as a foreign investor-friendly institution.
It's new expanded powers include the authority to
withdraw tax incentives and blacklist foreign
firms for infractions of the investment law.
The law also reportedly provides a legal
guarantee against the nationalization of foreign
assets. Although there was a similar provision in
the 1988 law, Myanmar nonetheless has a history of
state expropriation, including the controversial
seizure of the foreign-invested Mandalay Beer
joint venture in 1998.
Thein Sein used his
prerogative as president to send the previous
draft law back to parliament with recommended
revisions. Parliament will consider these when it
reopens in the third week of October.
Provisions covering land leases, tax
holidays and guarantees against nationalization
are not expected to change, say analysts
monitoring the law's passage. Other key elements,
including foreign ownership limits in local
ventures, will likely be heavily debated, analysts
predict.
Thein Sein reportedly favors
more-flexible ownership arrangements, with
variable percentage limits on foreign ownership
for different business sectors. His camp is also
apparently pushing for clearer definitions of the
sectors foreign investors will be barred, as well
as more specifics on the role foreign investors
will be allowed to play in liberalized industries.
The 11 restricted sectors included in the
current draft are reportedly down from an original
13 blacklisted areas. Many of them, however, are
unclearly defined, according to analysts
monitoring the situation. The broad restricted
sectors include agriculture, livestock, fishing,
production and services. The current draft allows
wholly owned foreign businesses in liberalized
sectors and a minimum 35% stake in joint ventures.
Foreign tie-ups would give local SMEs,
many of which have difficulty securing loans in
Myanmar's underdeveloped banking system, access to
sorely needed capital and technical expertise.
Foreign-invested SMEs would also help to bolster a
strata of the economy that many economists believe
will be a key driver of future growth.
Big
businesses, including those founded and led by
cronies of the previous ruling junta's military
leaders, are believed to feel threatened by the
financial firepower, technical expertise and
modern management techniques foreign investors
will bring in competing for local markets. They
are believed to back the conservative
parliamentarians now fighting for more
protectionist measures in the investment law.
Military monopolies Under
military rule, this small but powerful group of
businessmen were able to leverage their
relationships with military leaders to win
projects, permits and licenses. Limited
competition allowed a select few businessmen to
accumulate immense wealth through virtual local
monopolies, including in certain extractive
industries.
Many of them also benefited
from the junta's 2009 fire sale of state assets, a
campaign that was dressed up at the time as a
privatization of industrial assets but in
retrospect more clearly parceled out prime real
estate. The campaign also allowed certain senior
generals to ensure their economic futures in the
new democratic era through the purchase of assets
through their families or known crony proxies.
Those businessmen, however, could yet find
themselves on the wrong side of history. With the
transformation of government from a small group of
powerful soldiers to a broader collective of
presidential advisors, ministry officials and
parliamentarians, many former cronies no longer
command privileged access to key decision-makers.
More transparent decision-making and government
contracts granted by tender rather than as favors
also promise to level the competitive playing
field.
Moreover, Thein Sein and his
government allies have spoken out against the
country's endemic corruption, stating their
determination to put an end to the old system of
opaque privilege. The previous junta's cronies are
believed to have lost a valuable protector with
the resignation in May of former Vice President-1
Tin Aung Myint Oo, former head of the government's
Trade Council and chairman of the military-linked
Union of Myanmar Economic Holdings conglomerate.
Certain junta-linked businessmen have
recently taken steps to distance themselves from
their often murky pasts and rebrand themselves as
enthusiastic participants in Thein Sein's economic
reform program. Formerly reclusive business
leaders, including Zaw Zaw, the country's richest
tycoon and owner of the Max Myanmar, and Tay Za,
the controversial founder of the Htoo Trading
Company, have recently made themselves available
for image-burnishing media interviews. Others have
openly reached out to the Aung San Suu Kyi-led
political opposition - overtures the previous
ruling junta would have strictly forbidden.
Whether those moves will be enough to
avoid probing questions about how certain
businessmen amassed their wealth under military
rule is still unclear. Some political analysts
believe backward-looking investigations into their
past business practices could through court cases
result in the confiscation of wealth or even
potential imprisonment.
Several
businessmen associated with the outgoing junta are
still on US Treasury blacklists for their roles in
perpetuating military rule. Still others,
including the founders of certain major
conglomerates, are alleged to have made their
initial wealth through narcotics trafficking and
other illegal activities.
Private
corporate investigators are now awash with due
diligence work as image conscious foreign firms
try to probe the backgrounds of potential
investment partners. The government's new tender
system for state contracts, meanwhile, is expected
to require local firms to take on foreign partners
for certain big ticket projects, including badly
needed roadways and other infrastructure.
Political and economic reforms have left
the previous junta's business cronies with few
options to challenge the new order outside of
parliament. The investment law is one area,
however, where they are able to lobby
parliamentarians for protection from behind the
scenes without opening themselves and their
business interests to public criticism and
scrutiny.
Even with those proposed
protections, Myanmar likely lacks the capacity to
handle a sudden surge in foreign investment.
Nearly five decades of economic mismanagement
under military rule has left a legacy of degraded
infrastructure, rampant corruption, an
dysfunctional financial and government sectors,
among other shortcomings.
For foreign
investors concerned with reputational risks, there
are potential pitfalls of residual human-rights
abuses, shady connections between businessmen and
military commanders or other individuals involved
in criminal activities, and unresolved armed
ethnic conflicts.
Even with the passage of
a new investment law, foreigners will be subject
to Myanmar's notoriously pliable and corrupt
judiciary to enforce their contracts and settle
local disputes. The judiciary is now widely viewed
as a residual power center of the previous junta's
old guard. Some analysts believe the legal risks
will be amplified for deals done with businessmen
still closely linked to former military leaders.
Opposition leader Suu Kyi highlighted this
potential pitfall earlier this year at the World
Economic Forum when she cautioned that reform and
modernization of the judicial system has lagged
behind other areas. She has mentioned in other
speeches that rule of law remains a key problem
throughout the country. And so even if a more
liberal investment law is passed, foreign
investors will still have plenty of reasons to
beware in Myanmar.
Brian
McCartan is a freelance journalist. He may be
reached at bpmccartan1@gmail.com
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